Danville Bottlers is a wholesale beverage company. Danville uses the FIFO inventory method to determine the cost of its ending inventory. Ending inventory quantities are determined by a physical count. For the fiscal year-end June 30, 2018, ending inventory was originally determined to be $3,265,000. However, on July 17, 2018, John Howard, the companys controller, discovered an error in the ending inventory count. He determined that the correct ending inventory amount should be $2,600,000.

Danville is a privately-owned corporation with significant financing provided by a local bank. The bank required annual audited financial statements as a condition of the loan. By July 17, the auditors had completed their review of the financial statements which are scheduled to be issued on July 25. They did not discover the inventory error.

Johns first reaction was to communicate his finding to the auditors and to revise the financial statements before they are issued. However, he knows that his and his fellow workers profit-sharing plans are based on annual pretax earnings and that if he revises the statements, everyones profit-sharing bonus will be significantly reduced.

1. Describe the effect on ending inventory and net income. Note if net income will be overstated or understated and by how much.

2. how will the correction be reported in the financial statements? Which financial statement line must be restated at 7/1/2018?